This weekend, I reviewed a recent paper titled “Skill vs. Luck in Entrepreneurship and Venture Capital: Evidence From Serial Entrepreneurs” by Paul Gompers, Anna Kovner, Josh Lerner and David Scharfstein from Harvard. Regular readers of OnStartups will not be surprised that a paper with this kind of title caught my eye. It’s hard to find good, reasonably well supported writings on the topic of startups and this particular paper stood out for me.

I read through the paper and captured a few data points that I found really interesting and thought worthy of sharing with you. My hope is that it sparks some interesting dialog and conversation.

I have not been able to find a copy of this paper on the web yet (otherwise I would have linked to it). I’ll try to make contact with one or more of the authors and see if it I am allowed to distribute the full paper through this website (stay tuned for that).

Update: One of the readers of OnStartups.com was kind enough to share a link to the full paper.

I’ve done my best to capture the essence of some of these points, but there may be errors (unlike the authors, I do not have the burden of academic rigor here).

Six Interesting Stats About Startup Success1. Failure Increases Chances Of Success: Entrepreneurs who succeeded in a prior venture have a 30% chance of succeeding in their next venture. First-time entrepreneurs only have an 18% chance of succeeding. Interestingly, those have previously failed have a 20% chance of succeeding.

So, it seems that you're better off having started a company and having failed -- then not having started one at all. If you’re considering kicking off a startup, it seems that you should just go ahead and do it (even if you’re going to fail). Getting the first failure out of the way (assuming you learn what you should from it) will increase your chances the second time around.

2. VCs Really Do Invest In The People: Failed serial entrepreneurs are more likely than successful serial entrepreneurs to get funding from the same venture capital firm that financed their first ventures.

This doesn’t make complete sense to me, but I believe it. VCs are “relationship” investors and I can see how they might lean more towards the entrepreneur they know (even if their original startup was a failure) rather than take a chance on a successful serial entrepreneur they don’t know. On the other hand, if I were a limited partner and had a choice of VCs, I think I’d pick those that have a demonstrated history of backing successful serial entrepreneurs. But, I have a bias.

3. Serial Entrepreneurs More Likely To Raise Funding: Entrepreneurs are much more likely to receive first-round funding at an early stage (60% of the time) if this is their second or subsequent venture than first time entrepreneurs (which receive such funding 45% of the time).

Though the numbers seem a little high (this is probably because they’re talking about all funding, and not just VC funding), this makes sense. Nothing to talk about here.

4. First-Timers and Non-Successes Benefit More From VC Expertise: First-time entrepreneurs have a 17.6% chance of succeeding when funded by more experienced VC firms and an 11.7% chance of succeeding when funded by less experience VC firms. Failed entrepreneurs who are funded by experienced VC firms have a 22.1% chance of succeeding compared to a 14.7% chance of succeeding when they are funded by less experienced VC firms. So, first time entrepreneurs and failed entrepreneurs are more likely to benefit from VC firm expertise..

This seems like one more reason to pick the top-tier, experienced VC (if you have the choice). Overall, you’ll likely get a better deal. Not only is this “smart money”, it’s more money too.

6. Serial Entrepreneurs Get Better Terms: Repeat entrepreneurs receive more favorable terms for vesting, board structure and liquidation rights, but do not receive greater equity ownership percentages. So, though serial entrepreneurs may extract greater value from VCs, this value is in the non-price terms of the investment.

I don’t like this particular data point as I’d hope to get better pricing terms from a VC as a “repeat” entrepreneur. But, then again, things outside of pure valuation are often just as important so I’m not going to complain.

So, what do you think? Do any of the above points agree with your own experience or instincts? Anything leap out at you as being counter-intuitive?

Did the paper address how much of point 4 is due to selection and how much is due to ongoing support? I would expect the more experienced VCs to be better at selecting successes.

Kaushal

Hi Dharmesh,

Thanks for posting this article, I had a chance to the paper too. And if nothing else, point no.1 is definitely very encouraging for a lot of budding entrepreneurs. Not that we would start to fail, but having failed statistically improves your chances of success, which is GOOD news.

Kaushal

Kaushal

Hi Dharmesh,

Thanks for posting this article, I had a chance to the paper too. And if nothing else, point no.1 is definitely very encouraging for a lot of budding entrepreneurs. Not that we would start to fail, but having failed statistically improves your chances of success, which is GOOD news.

I'd be really curious if the same numbers hold for open source projects. What I have observed is that VCs will fund traditional companies without a product, team or even a customer in place. When they fund an open source project they want the product created, a community established, customers, etc.

To me this is a significant difference and I wonder how the numbers change.

I'd be really curious if the same numbers hold for open source projects. What I have observed is that VCs will fund traditional companies without a product, team or even a customer in place. When they fund an open source project they want the product created, a community established, customers, etc.

To me this is a significant difference and I wonder how the numbers change.

Andrew Lavers

On point 1 - "So, it seems that you're better off having started a company and having failed -- then not having started one at all." If this is comparing the 18% vs. 20% is that difference statistically significant? Or am I missing the point?

The 30% is an eye-opener to me because the urban myth seems to be "once a successful entrepreneur always a successful entrepreneur"

My conclusion is a little different but may just be a (non academic) leap: Better to learn from successful entrepreneurs than from those that have failed.

Andrew Lavers

On point 1 - "So, it seems that you're better off having started a company and having failed -- then not having started one at all." If this is comparing the 18% vs. 20% is that difference statistically significant? Or am I missing the point?

The 30% is an eye-opener to me because the urban myth seems to be "once a successful entrepreneur always a successful entrepreneur"

My conclusion is a little different but may just be a (non academic) leap: Better to learn from successful entrepreneurs than from those that have failed.

simon

On point 1 it may be that 20% of the second timers succeed. However it does not follow that you have more chance second time around.

Not all failures try again. I suspect the one's who try a second time are those who almost succeeded or have greater motivation. What is clear is that the second timers are not necessarily representative.

simon

On point 1 it may be that 20% of the second timers succeed. However it does not follow that you have more chance second time around.

Not all failures try again. I suspect the one's who try a second time are those who almost succeeded or have greater motivation. What is clear is that the second timers are not necessarily representative.

I prefer to read the original study before providing substantive comment. In brief at this time:

[1] My reading of your article makes me wonder... What was the purpose of the original study?

[2] I have noted articles and blog posts within the past two months that have addressed VC funding for startups wherein it was suggested that VC funding provides economic and expertise value to the founders and their startup organizations. In other words, articles heavily weighted in favor of VC funding. I say... VC funding with what risks and at what costs for the founders and their startup organizations. I question this VC funding bias, and I suggest young aspiring software entrepreneurs ought do a hard think toward alternative means of funding their startups.

I prefer to read the original study before providing substantive comment. In brief at this time:

[1] My reading of your article makes me wonder... What was the purpose of the original study?

[2] I have noted articles and blog posts within the past two months that have addressed VC funding for startups wherein it was suggested that VC funding provides economic and expertise value to the founders and their startup organizations. In other words, articles heavily weighted in favor of VC funding. I say... VC funding with what risks and at what costs for the founders and their startup organizations. I question this VC funding bias, and I suggest young aspiring software entrepreneurs ought do a hard think toward alternative means of funding their startups.

#1 definitely is encouraging for those of us who have a failure behind us. Learning from the mistakes made in the first try surely should increase your chances the second time around.

I may not have learned what works, but I have learned a few things that don't...

Thanks for the posting. I Hope to read the whole thing if I can get my hands on it.

zoomba_the

This is VERY confusing. Are you referring to startup founders or entrepreneurs? The chances of succeeding if you open a Pizza Hut are greater than a software startup. But will a PH froanchisee be able to get Venture funding?

zoomba_the

This is VERY confusing. Are you referring to startup founders or entrepreneurs? The chances of succeeding if you open a Pizza Hut are greater than a software startup. But will a PH froanchisee be able to get Venture funding?

Joe Johnson

Cause and Effect are not so clearly defined.

As Paul Graham has pointed out very clearly, the top shelf VC firms get first crack at funding startups. It is not clear to me that top VC firms help drive success or if they simple get to skim the cream off the top

Joe Johnson

Cause and Effect are not so clearly defined.

As Paul Graham has pointed out very clearly, the top shelf VC firms get first crack at funding startups. It is not clear to me that top VC firms help drive success or if they simple get to skim the cream off the top

Joe Johnson's point, that "top-tier" VCs may do better simply because they get first pick of the hottest companies, is applicable to your point #2 as well. That point says "Failed serial entrepreneurs are more likely than successful serial entrepreneurs to get funding from the same venture capital firm that financed their first ventures." This may be because an entrepreneur with a positive track record is going to find it easy to get the attention of any investor, whereas an entrepreneur without a hit is just some dude with a business plan -- except to those who've met and worked with him/her personally.

Joe Johnson's point, that "top-tier" VCs may do better simply because they get first pick of the hottest companies, is applicable to your point #2 as well. That point says "Failed serial entrepreneurs are more likely than successful serial entrepreneurs to get funding from the same venture capital firm that financed their first ventures." This may be because an entrepreneur with a positive track record is going to find it easy to get the attention of any investor, whereas an entrepreneur without a hit is just some dude with a business plan -- except to those who've met and worked with him/her personally.

This makes sense because the serial entrepreneur has been through the process before and is aware of the terms and conditions they can put on the table.

It is very telling that despite their previous negotiation experience they do not receive a better deal equity wise.

It succinctly demonstrates the 'Golden Rule' - he who has the gold, rules!

Regards,Scotthttp://www.invoiceplace.com

Jonathan Nelson

I found your article and the paper a very interesting read. I am a little concerned about its data, however.

Granted, the paper limits its scope to founders that recieved at least one round of funding from VC firms. The authors also state their definition of success:" We define “success” as going public or filing to go public by December 2003. The findings are similar if we define success to also include firms that were acquired or merged. "

So, are we to assume from this article, however, that 18-20% of companies that recieve 1st round venture funding will either go public, be acquired or merged? That figure seems a little high, at least a lot higher than the 5-10% that usually gets passed around as a success rate for VC funded companies.

Jonathan Nelson

I found your article and the paper a very interesting read. I am a little concerned about its data, however.

Granted, the paper limits its scope to founders that recieved at least one round of funding from VC firms. The authors also state their definition of success:" We define “success” as going public or filing to go public by December 2003. The findings are similar if we define success to also include firms that were acquired or merged. "

So, are we to assume from this article, however, that 18-20% of companies that recieve 1st round venture funding will either go public, be acquired or merged? That figure seems a little high, at least a lot higher than the 5-10% that usually gets passed around as a success rate for VC funded companies.

Herald

Hi, thank you very much to all of you about these contributions to startup issues, it is always a good breath of fresh air to read your various posts.

Things are quite slow however here in europe although there might be some recent changes in public attitude and in gouvernment support . Also, some funny initiatives are on their way, apparently just started, like facilitating capital funding through pixel ad (link should be something like www.firstmillioneuros.eu )

Herald

Hi, thank you very much to all of you about these contributions to startup issues, it is always a good breath of fresh air to read your various posts.

Things are quite slow however here in europe although there might be some recent changes in public attitude and in gouvernment support . Also, some funny initiatives are on their way, apparently just started, like facilitating capital funding through pixel ad (link should be something like www.firstmillioneuros.eu )

It's not that the numerator (successes) got larger, but rather that the denominator (# of people attempting) went down.

Jitendra Vats

What is the definition of success? Is it an IPO? Is it raising next round of funding? Is it raising $100M in an IPO? Is it reaching a market cap if $1B 3 years after an IPO?

Jitendra Vats

What is the definition of success? Is it an IPO? Is it raising next round of funding? Is it raising $100M in an IPO? Is it reaching a market cap if $1B 3 years after an IPO?

Blake Southwood

Each of my startups is as different as night and day. I'm more determined when one fails and work harder on the next one. I learned that hardware development takes too long. I learned to write my own code for software and find better programmers to increase software production. Most importantly I learned to study markets and the competition better and listen to the users(future customers) and my confidence level has increased with my past failures. Another big difference is that my current two startups are for the global market. The book "Founders At Work" is a good read. There is luck involved and it takes longer then you think it will take and everything goes wrong. But along the way new ideas blossom and that's when it gets interesting.

Blake Southwood

Each of my startups is as different as night and day. I'm more determined when one fails and work harder on the next one. I learned that hardware development takes too long. I learned to write my own code for software and find better programmers to increase software production. Most importantly I learned to study markets and the competition better and listen to the users(future customers) and my confidence level has increased with my past failures. Another big difference is that my current two startups are for the global market. The book "Founders At Work" is a good read. There is luck involved and it takes longer then you think it will take and everything goes wrong. But along the way new ideas blossom and that's when it gets interesting.